When Mr Jamshetji Tata took initiative in early twentieth century to install a Hydroelectric Power Station (72 MW) at Khopoli, Lonavala to light up Mumbai in1915, I am reasonably sure that making profit out of it would have been the last thing in his mind. Instead, his interprising efforts were driven by the goal and vision of a cheap, clean and abundant power for the people of the country as basic needs of the economic progress. Many people consider it as India’s first significant power project for the civilian use.
However, officially India’s first Hydroelectric Power Station is located on the banks of river Kaveri at Shivasamudra, a small town in Mandya district of Karnataka and is still functional. It was my pleasure to visit this station in 2012. This station was commissioned largely by the efforts of Sir K. Seshadri Iyer, then Diwan of Mysore for supplying electricity to Kolar Gold Fields in 1902. Another record of the oldest hydro based power plant of a very small capacity of 2 x 65 kW goes to Darjeeling in 1897 which did not find many takers for the use of electrical energy those days.
Power Development since Independence
Although some initiatives were taken here and there in the pre-independence period but significant progress has been achieved in generation building capacity only after independence. Over the past 60 years or so, India has taken rapid strides in the development of the power sector in terms of augmenting power generation capacity as also in making power available in far and nook corners of the country.
For illustration, the total generation capacity was less than 2,000 MW at the time of independence which has now reached to a level of 2,50,257 MW as of July, 2014. Progress in the initial five year plans was slow to moderate but major breakthrough in capacity building was achieved in the eleventh plan when the private sector participation was encouraged at a large scale. The total capacity addition of 54,964 MW in the eleventh plan period is only marginally less compared to the combined achievement of previous three five year plans of 56,568 MW.
Of the existing 250,257 MW capacity, about 172,986 MW (69.1%) is under the thermal i.e. coal, gas and diesel based, 40,798 MW (16.3%) under the hydro, 31,692 MW (12.7%) under the renewable energy sources and remaining 4,780 MW (1.9%) under the nuclear energy. Despite this huge capacity, there is still severe shortage of power in the country leading to a large scale load shedding in various states in both urban and rural areas. The existing per capita consumption of the electricity in the country is around 917 kWh which is one of the lowest among the developed and non-developed countries.
In order to meet the ever increasing requirements of the electricity, also necessary to enhance the economic growth of the country, a large scale addition to the installed generation capacity and commensurate development of associated transmission and distribution infrastructure is required. The current 12th Five Years Plan has an ambitious target of the capacity building of an additional 88,537 MW with another about one hundred thousand in the following five years plan with an objective to meet growing power demands with 24×7 supply to consumers.
The Indian power sector is one of the most diversified sector in the world over. Various sources for power generation range from conventional sources like coal, lignite, natural gas, oil, hydro and nuclear power to non-conventional yet viable sources like wind, solar and agriculture and domestic wastes. The demand for the electricity in the country is growing at a faster pace and expected to grow further in the ensuing years. In order to meet the increasing demand of the electricity, a massive addition to the existing capacity is required. For this, on one hand private sector is being encouraged by delicensing electricity generation and facilitating private developers in various ways, on the other hand steps are being taken to adopt fuel efficient newer technologies besides encouraging renewal sources of energy.
While generating more power, the evacuation of this power and proper distribution thereof is also equally important which again require a massive infrastructure with skilled and un-skilled manpower resources. For smooth and efficient transportation of electricity from one part to another part of the country, a national grid is in place. The country is divided into five electrical regions, namely northern, southern, western, eastern and north-Eastern regions for the purpose of grid operation. In the past, they were operating in asynchronous mode but now all these regions are synchronously connected which means power can now smoothly flow from one part of the country to another. The national grid needs further strengthening and augmentation to cop up the existing congestion in transmission network in certain areas as also to meet new challenges on account of ambitious generation capacity building programmes. In addition to the national grid, the respective states have their own state grid for the inter and intra state transmission.
Distribution of the electricity is largely a state subject in India. The responsibility for the distribution of electricity to the end consumer is largely undertaken by the state owned Distribution companies. The private sector has limited presence in distribution segment in certain parts of country including Delhi, Mumbai, Odisha etc. Incidentally, this happens to be weakest link among various segments associated with the power industry. Distribution infrastructure largely consists of sub-stations, low voltage lines, transformers and associated paraphernalia. The majority of the distribution power utilities are running into losses due to issues like obsolete and outdated infrastructure, energy losses in transmission, distribution and theft, inefficient metering, billing and collection, payment of the subsidy and cross-subsidy, non-implementation of cost reflective tariff, and so on so forth.
Issues and Challenges
In India, power is on the concurrent list which means both the Centre and States have responsibility in power development. While the Centre is carrying out its obligations through the CPSUs, the States have corporatized their erstwhile State Electricity Boards (SEBs) into various companies for the same purpose. Indian power sector is facing a plethora of issues and challenges including the shortage of fuel, idle generation capacity due to lack of demand from cash starved distribution companies or fuel supply, dipping plant load factor (PLF), renovation and modernization of aging plants, securing land and environmental clearances, high aggregate transmission and commercial (AT&C) losses in distribution, aging and obsolete distribution networks, low or no progress in implementation of Ultra Mega Power Projects, absence of cost-reflective tariff, regulatory assets etc. Some of the more serious issues impacting the power sector are briefly narrated here.
Fuel Shortage: At present, of the total generation capacity about 60% is coal/lignite based and around 76% of the generation comes from the coal-fired power stations making it back-bone of the power sector. The PLF of the thermal power stations remained about 65.5% during the year 2013-14 and one of the major factors has been the widening gap between the demand and supply of coal. A public sector company of the Government of India Coal India Limited (CIL) and its subsidiaries have monopoly in production and supply of coal with exception of some captive coal mines and coal imports, the coal supply to most power plants is assured through the coal linkage and signing of fuel supply agreements (FSAs) between the CIL and power plants.
Needless to go into statistics of demand and availability but many arguments are given in favour and against the performance of CIL and fuel crisis but the fact remains while there has been a rapid progress in augmentation of the generation capacity, mostly coal based, with large scale private sector participation in recent years but coal production has not increased with commensurate pace. Developers are not keen for the imported coal, though of superior quality, due to its high cost fearing this may lead to high tariff making it difficult to sale it to already cash deficient distribution utilities. Available options to remedy this situation are a) steps must be taken by CIL, a cash rich company, to augment its coal mining capacity to match the growing demand of coal in the next few years; b) government may consider opening the coal mining sector for private players; c) of late international coal prices are showing fall in prices, opportunity may be availed by developers to make use of the imported coal.
AT&C Losses: Distribution losses of electricity continue to be very high across the country barring few exceptions like the states of Delhi (15.72%), Himachal Pradesh (15.76%) and Gujarat (16.89%). The national average AT&C loss stands at about 27% compared to the benchmark acceptable loss of about 6-8% in developed countries. Some of the states like Jammu & Kashmir (73%) and Arunachal Predesh (61%) have a very high and unacceptable level of AT&C loss. This is on account of aging distribution network, lack of credible accounting database, inefficient metering, billing and collection as also large scale of the theft of power in many places.
To bail out distribution utilities from this unacceptable position, the central government had launched a Restructured Accelerated Power Development and Reforms Programme (R-APDRP) in 2008 with an objective of reduction in AT&C losses in urban areas with a population of more than 30 thousand (10 thousand for special category states of north-east and Jammu & Kashmir). Projects under the scheme are taken up in two parts; Part-A aimed at establishing IT enabled system for energy accounting and Part-B for the upgradation and strengthening of distribution network in these towns. Implementation of the R-APDRP is under various stages of execution and it is likely to improve distribution infrastructure and reduction of AT&C losses in the coming years. Transmission and distribution loss prevented is the power saved for the use of consumers.
Cost-reflective Tariff: Despite corporatization of the erstwhile SEBs, distribution utilities continue to function with too much intervention and control of respective state governments. Since electricity has a vital role in day to day life of masses, the political leadership often use this plank to get public laurel and sympathy by intervening in tariff fixation. They take populist measures to supply free or concessional electricity to certain categories of consumers such as agriculture, rural and urban consumers in the lower bracket of consumption levels. Though the Electricity Act, 2003 provides the provision of subsidy by states and cross-subsidy with some caution, the states do not follow it strictly due to various reasons. Subsidy is not paid in time, cross-subsidy is often unrealistic and state electricity regulatory commissions are prone to political influence.
Consequently, a significant gap remains between the actual cost of supply and revenue realized leaving the distribution utility in deficit. On one hand, this gap in tariff aggravated with other issues leads to a significant losses to utility making them unviable, on the other hand the unrealized cost of supply is accumulated as regulatory assets with the liability to absorb it in future tariff with accrued interest. This is a very sorry state of affair rendering certain state utilities in tremendous accumulated losses and unviable functioning. To bail out such utilities, in the year 2012-13 the federal government has started a Financial Restructuring Plan (FRP) which inter alia includes part capital assistance subject to certain reforms to be undertaken by the state distribution utility.
Statutory Clearances: Though delicensing of generation and transmission was a welcome measure for power development, there are still numerous steps and layers of delay prone government approval and statutory clearances at various levels making the process often too lengthy and cumbersome. The most difficult and time-taking being securing land and environment & forest clearances. In many cases, this takes three to five years or even more delaying the project with time and cost overruns. Securing fuel linkage or captive mines too has been a rather long-drawn and controversial point leading to scams like Coalgate.
It is understood the new NDA government is working on how to make it easy and expedite clearances in a fair and transparent manner. Though the states have undergone reform to unbundle the erstwhile SEBs yet State Transmission Utility (STU) and State Load Dispatch Centre (SLDC) are still under the state organizational and administrative control through proxy. Despite provision made in the Electricity Act for multiple licensees, no state has so far encouraged more than one licensee in one distribution area to encourage competition and open access.
Investor Friendly Climate: Private investment has steadily grown in the country since the liberalization of the power sector by allowing hundred percent foreign direct investment. However, many major international companies are still apprehensive and reluctant to invest in India’s energy sector due to several restrictive policies and cumbersome procedures. Moreover, the coal mining sector continues to remain monopoly of one government owned company almost closed for the private participation. In terms of the general investment environment, the doing business index (DBI) by the World Bank in 2012 ranked India at 132nd out of 183 countries. Clearly, the country needs to go a long way to create investment friendly business climate to attract more investment.
Power Sector Reforms
Even towards the end of the previous century, the power sector was perceived to be riddled with fundamental problems necessitating the major reforms. Although some reforms were initiated but the major thrust to reforms started after enactment of the Electricity Act in 2003. This was of course a major milestone with the mission to provide uninterrupted and quality power to all at reasonable rates within a competitive and liberal framework by protecting the interests of consumers while simultaneously creating a conducive environment for attracting investments in the sector. In an endeavor to achieve these objectives, the federal government had further issued the National Electricity Policy in 2005 followed by the National tariff policy in 2006 to steer a healthy evolution of power sector within the ambit of the Act. However, how far the country has been successful in reforms remains to be seen.
It is obvious that the sector cannot deliver on its social commitments unless it is financially and commercially viable too. Let us see briefly in the next few paragraphs major reforms undertaken as intended under the Act, extent of their success and what needs to be further done to transform the power sector into a robust and healthy sector providing intended deliverables to various stakeholders.
- The erstwhile State Electricity Boards have been unbundled into separate power companies for generation, transmission, distribution, trading etc. by all states with an objective to make the power sector efficient and financially viable. While generation and transmission companies are generally doing well but a majority of the distribution companies continue to incur losses under state interference and control. While to make them viable, the government should serve as facilitator but not at the cost of rigid control over their organization and functions. Besides there is an unfinished agenda of freeing the State Transmission Utility (STU) and the State Load Dispatch Centre (SLDC) from the state control.
- All states have constituted the State Electricity Regulatory Commission to independently deal with tariff matters and related petitions from the stakeholders. While the state governments pressurise regulators to keep tariff low as a populist measure, many regulators are also not above the board in exercising their independence for the obvious reasons of quid pro quo. The minimum requirement is that the tariff should be cost-reflective and if the government desires to give concession to consumers, it should be done through upfront subsidy.
- A majority of states have institutions like Consumer Grievances Redressal Forum (CGRF), Ombudsman, Special Courts, State Coordination Forum put in place and working to look into redressal of grievances of consumers, hear appeals, speedy trial of offences relating to theft of electricity, smooth and coordinated development of the power system in the state etc.
- Saying goodbye to cost plus regime barring few exceptions, it has been made compulsory to procure all future power through the competitive bidding route from January, 2011 onwards to enhance quality of service. This applies to all generation and transmission project except those granted waiver for the given reasons.
- Unless this write up is stretched too far, it would not be possible to give details of all measures taken to reform the sector. However, for a passing reference, the other important reforms include strict grid discipline, laying standards of performance and operating norms for utilities, open access in distribution, metering of all consumers, minimizing cross-subsidies, timely finalization of annual accounts, multi-year tariff, availability based tariff, time of day tariff etc.
Futuristic Developments
Power sector cannot deliver on its social commitments unless it is commercially and financially viable. To improve the investment and financial health of utilities, continuous reforms are essential to strengthen governance standards of Distribution utilities, simplification of procedures of seeking statutory land and environment clearances, tariff rationalization and optimizing the procurement cost of power. The federal government has taken several measures to address these issues and more efforts are in the pipeline. Some of such initiatives are briefly given below.
UMPPs: The government is endeavoring to set up several Ultra Mega Power Projects (UMPPs) of 4,000 MW each in the public private participation (PPP) mode. Usually land, water and fuel linkages for such projects are facilitated by the government by constituting a Special Purpose Vehicle (SPV) and the project is finally owned and executed by the private developer selected through the competitive bidding. Four such UMPPs were awarded in the last decade, of which two at Mudra, Gujarat and Sasan, MP are already in operation while the remaining two at Krishnapatnam, Andhra Pradesh and Tilaiya, Jharkhand have run into trouble due to subsequent issues escalated by the Developer having significant bearing on the cost escalation. About a dozen other UMPPs in different states are under various stages of clearances.
Flagship Schemes: The federal government had undertaken a massive scheme namely Rajeev Gandhi Gramin Vidyut Yojana (RGGVY) during the 10th Five Years Plan to take electricity to all villages in the country (estimated villages 597, 464). The scheme is continuing in the 13th Plan too and as on June, 2014 reportedly 571,496 villages have been electrified. Another major scheme R-APDRP referred to in previous paragraphs is addressing the issues of distribution infrastructure of the utilities in states. The government has also set up a National Electricity Fund as an interest subsidy scheme for the system augmentation projects in states not covered under R-APDRP. In addition, to improve the financial health of the state utilities running into heavy losses, the federal government has approved a Financial Restructuring Plan which inter alia provides for the restructuring of losses by liability sharing between the state and utility with easy re-payment facility including part capital assistance from the Centre.
Technology Initiative: The developers in the public and private sectors are being encouraged to go for the fuel efficient super-critical and ultra super-critical technologies with 660 MW units and above while constructing new power plants in future. The country is also adopting a two pronged strategy whereby on one hand, continuous efforts are being made to augment the supply of clean and green power, and on the other hand, more emphasis is on the need for demand side management and energy efficiency measures. Such measures are essential in view of the need to conserve the depleting energy resources and to minimize the carbon footprint of the sector.
Power Market: Power trading is recognized as a distinct licensed activity in India under the Electricity Act with a view to developing a robust electricity market. Presently, two power exchanges are in place for the online sale and purchase of electricity as also a fairly large number of companies registered as trading licensees. Act also provides provision of open access whereby regulators are only required to determine wheeling and cross-subsidy surcharge for the consumers of 1 MW capacity and above. Notwitstanding these provisions, currently only about 3% of power is traded through power exchanges and trading licensees. Development of power market is not only in the interest of consumers but it also adds to the investors’ confidence. Now the federal government is seriously contemplating to separate wires (distribution) and supply business through legislation to facilitate competition and development of power market.
Renewable Energy: The country realizes the need for minimizing dependence on the fossil fuel based energy. Fossil based fuels like coal, gas, diesel are exhaustible energy sources which are fast depleting globally due to mass consumption to meet growing energy needs. Fortunately India is geographically placed in a region where there is no dearth of wind and sun light. Presently, India has the 5th largest wind generating capacity in the world and the 12th largest solar generating capacity in the world. The country is seriously contemplating to tap these energies and a separate Ministry has been created to pursue unhindered progress of renewable energy sources as a popular means of futuristic affordable power. Besides, the north and north-eastern region of the country have tremendous hydro potential which needs to be tapped by removing existing bottlenecks in development of Hydro Power Plants.
Continued to “Indian Energy Scenario – Renewal Energy”
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